Tag: economics

Earlier today, I banned the commenter “map” for his ignorant attempt to “correct” those who actually understand how money is created. And on that note, if, at this point, you are going to try to argue with me on core economic concepts, you simply will not be permitted to comment here. The fact that I have correctly predicted two out of the last two serious economic crises – and done so in a timely manner – is sufficient justification for not putting up with idiots opining in ignorance on the basis of their outdated college textbooks. I am perfectly familiar with their beliefs about everything from comparative advantage to the money supply to the woefully inaccurate belief that banks keep 10 percent of their deposits in reserve.

In any event, back in 2014, the Bank of England helpfully explained how modern money is actually created in an article entitled Money Creation in the Modern Economy (pdf). If you don’t understand that money is debt, read the whole thing. And if you still don’t understand that after reading the article, read it again.

One common misconception is that banks act simply as intermediaries, lending out the deposits that savers place with them.  In this view deposits are typically ‘created’ by the saving decisions of households, and banks then ‘lend out’ those existing deposits to borrowers, for example to companies looking to finance investment or individuals wanting to purchase houses…. Another common misconception is that the central bank determines the quantity of loans and deposits in the economy by controlling the quantity of central bank money — the so-called ‘money multiplier’ approach….

Lending creates deposits — broad money determination at the aggregate level

As explained in ‘Money in the modern economy:  an introduction’, broad money is a measure of the total amount of money held by households and companies in the economy.

Broad money is made up of bank deposits — which are essentially IOUs from commercial banks to households and companies — and currency — mostly IOUs from the central bank. Of the two types of broad money, bank deposits make up the vast majority — 97{de336c7190f620554615b98f51c6a13b1cc922a472176e2638084251692035b3} of the amount currently in circulation. And in the modern economy, those bank deposits are mostly created by commercial banks themselves.

Commercial banks create money, in the form of bank deposits, by making new loans.  When a bank makes a loan, for example to someone taking out a mortgage to buy a house, it does not typically do so by giving them thousands of pounds worth of banknotes.  Instead, it credits their bank account with a bank deposit of the size of the mortgage.  At that moment, new money is created. For this reason, some economists have referred to bank deposits as ‘fountain pen money’, created at the stroke of bankers’ pens when they approve loans.

Just as taking out a new loan creates money, the repayment of bank loans destroys money. For example, suppose a consumer has spent money in the supermarket throughout the month by using a credit card.  Each purchase made using the credit card will have increased the outstanding loans on the consumer’s balance sheet and the deposits on the supermarket’s balance sheet. If the consumer were then to pay their credit car bill in full at the end of the month, its bank would reduce the amount of deposits in the consumer’s account by the value of the credit card bill, thus destroying all of the newly created money.

Banks making loans and consumers repaying them are the most significant ways in which bank deposits are created and destroyed in the modern economy.

Now, perhaps you will understand why I am a deflationista. And so are you, if you believe that any of the current outstanding debt will be written off or otherwise go unpaid, even if you don’t realize that you are. Debt forgiveness and bankruptcy-related debt write-offs are the literal destruction of money, and since deflation is a reduction in the money supply, any reduction in the amount of debt must necessarily be deflationary.

NN Taleb is right about letting the airlines fail:

“Planes will fly with new owners.”

Famed author and statistician Nassim Nicholas Taleb has trained his sights on billionaire Richard Branson, urging the UK government to let the airline owned by the “tax refugee” to go bankrupt. Branson has had a torrid fortnight, drawing the ire of politicians of all stripes for putting all Virgin Atlantic staff on unpaid leave because the carrier has been walloped by the Covid-19 pandemic.

The tycoon has led the calls for a state-sponsored bailout of the aviation sector, but plans to use the funds to cover fixed costs, rather than pay its staff.

That goes for the banks too.

The God-Emperor may – I stress MAY – have already nationalized the Federal Reserve, if these complaints from Bloomberg are on point:

The economic debate of the day centers on whether the cure of an economic shutdown is worse than the disease of the virus.  Similarly, we need to ask if the cure of the Federal Reserve getting so deeply into corporate bonds, asset-backed securities, commercial paper, and exchange-traded funds is worse than the disease seizing financial markets. It may be….

To put it bluntly, the Fed isn’t allowed to do any of this. The central bank is only allowed to purchase or lend against securities that have government guarantee. This includes Treasury securities, agency mortgage-backed securities and the debt issued by Fannie Mae and Freddie Mac. An argument can be made that can also include municipal securities, but nothing in the laundry list above.

So how can they do this? The Fed will finance a special purpose vehicle (SPV) for each acronym to conduct these operations. The Treasury, using the Exchange Stabilization Fund, will make an equity investment in each SPV and be in a “first loss” position. What does this mean? In essence, the Treasury, not the Fed, is buying all these securities and backstopping of loans; the Fed is acting as banker and providing financing. The Fed hired BlackRock Inc. to purchase these securities and handle the administration of the SPVs on behalf of the owner, the Treasury.

In other words, the federal government is nationalizing large swaths of the financial markets. The Fed is providing the money to do it. BlackRock will be doing the trades.

This scheme essentially merges the Fed and Treasury into one organization. So, meet your new Fed chairman, Donald J. Trump. [emphasis added – VD]

In 2008 when something similar was done, it was on a smaller scale. Since few understood it, the Bush and Obama administrations ceded total control of those acronym programs to then-Fed Chairman Ben Bernanke. He unwound them at the first available opportunity. But now, 12 years later, we have a much better understanding of how they work. And we have a president who has made it very clear how displeased he is that central bankers haven’t used their considerable power to force the Dow Jones Industrial Average at least 10,000 points higher, something he has complained about many times before the pandemic hit.

When the Fed was rightly alarmed by the current dysfunction in the fixed-income markets, they felt they needed to act. This was the correct thought. But, to get the authority to stabilize these “private” markets, central bankers needed the Treasury to agree to nationalize (own) them so they could provide the funds to do it.

In effect, the Fed is giving the Treasury access to its printing press. This means that, in the extreme, the administration would be free to use its control, not the Fed’s control, of these SPVs to instruct the Fed to print more money so it could buy securities and hand out loans in an effort to ramp financial markets higher going into the election. Why stop there?

The concerns about inflation – which as a deflationista I don’t take very seriously anyhow – are obviously far less important than the potential prospect of the USA taking control of its own money supply again.

It’s quite common for stupid and self-righteous conservatives to object to student loan debt cancellation on the basis of “personal irresponsibility”, moral hazard, and the fact that the student signed the loan contract. But as Zippy Catholic points out, Thomas Aquinas conclusively answered that objection a long time ago.

Accordingly we must also answer to the question in point that it is by no means lawful to induce a man to lend under a condition of usury: yet it is lawful to borrow for usury from a man who is ready to do so and is a usurer by profession; provided the borrower have a good end in view, such as the relief of his own or another’s need. Thus too it is lawful for a man who has fallen among thieves to point out his property to them (which they sin in taking) in order to save his life, after the example of the ten men who said to Ismahel (Jeremiah 41:8): “Kill us not: for we have stores in the field.”
– Thomas AST II-II, Q78, A4):

Since borrowing at usury is inherently scandalous, it probably depends on the extent of the need. But you’ve got pretty wide moral discretion to hand over your property to thieves, so you’ve probably got similar prudential latitude here.  As a matter of intrinsic morality, usury – insisting on interest when making a mutuum loan – is a sin on the part of the lender, not the borrower.

The lender is the wrongdoer, not the borrower. Therefore, there is no moral hazard created by cancelling student loan debt, unless the government then proceeds to bails out the lender. It is bailouts, not debt cancellations, that are both immoral and morally hazardous by nature.

It’s not often that I agree with socialist economics, but in this case, my only disagreement with Michael Hudson’s argument is that we are quite obviously already in a depression. It’s too late to avoid it, but a debt jubilee – as commanded by the Bible – is both a way to end the depression and free the productive classes from the chains of a relentlessly rapacious and entirely anti-productive financial elite:

Even before the coronavirus appeared, many American families were falling behind on student loans, auto loans, credit card balances and other payments. America’s debt overhead was pricing its labor and industry out of world markets. A debt crisis was inevitable eventually, but covid-19 has made it immediate.

Massive social distancing, with its accompanying job losses, stock dives, and huge bailouts to debt-strapped corporations, raises the threat of a depression. But it doesn’t have to be this way. History offers us another alternative in such situations: a debt jubilee. This slate-cleaning, balance-restoring step recognizes the fundamental truth that when debts grow too large to be paid without reducing debtors to poverty, the way to hold society together and restore balance is simply to cancel the bad debts.

The word Jubilee comes from the Hebrew word for trumpet — yobel. In Mosaic Law, it was blown every fifty years to signal the Year of the Lord, in which personal debts were to be cancelled. The alternative, the prophet Isaiah warned, was for smallholders to forfeit their lands to creditors: “Woe to you who add house to house and join field to field till no space is left and you live alone in the land.” When Jesus delivered his first sermon, the Gospel of Luke describes him as unrolling the scroll of Isaiah and announcing that he had come to proclaim the Year of the Lord, the Jubilee Year.

Until recently, historians doubted that such a debt jubilee would have been possible in practice, or that such proclamations could have been enforced. But Assyriologists have found that from the beginning of recorded history in the Near East, it was normal for new rulers to proclaim a debt amnesty upon taking the throne. Instead of blowing a trumpet, the ruler “raised the sacred torch” to signal the amnesty.

It is now understood that these rulers were not being utopian or idealistic in forgiving debts. The alternative would have been for debtors to fall into bondage. Kingdoms would have lost their labor force, since so many would be working off debts to their creditors. Many debtors would have run away (much as Greeks emigrated en masse after their recent debt crisis) and communities would have been prone to attack from without.

The parallels to the current moment are notable. The U.S. economy has polarized sharply since the 2008 financial crisis. For far too many, the debts in place leave little income available for spending on goods and services or in the national interest. In a crashing economy, any demand that newly massive debts be paid to a financial class that has already absorbed most of the wealth gained since 2008 can only further split our society.

The way to restore normalcy today is a debt writedown. The debts in deepest arrears, and most likely to default, are student debts, medical debts, general consumer debts and purely speculative debts. They block spending on goods and services, shrinking the “real” economy. A debt writedown would be pragmatic, not merely a moral sympathy with the less affluent.

Financialization does not help the economy by making it more efficient. To the contrary, it makes the economy far more fragile while destroying the underlying society for the benefit of a few foreign invaders.

It’s fascinating to see people preaching against “hoarding” when they have no problem with debt-funded purchases. Both involve pulling the demand curve forward, but debt is considerably worse than hoarding because you’re making the purchases with money you don’t have.

And yet, people have no problem when it’s done in the much more harmful manner, mostly because they don’t understand the underlying mechanics or the inevitable consequences. Whereas, they are capable of grasping the cause-and-effect resulting in an empty shelf at the local supermarket.

Five percent, 24 percent, it’s hard to say exactly:

Goldman Sachs predicts the coronavirus crash will be bigger than it originally thought. In a Friday research note, the bank projected a 24 percent drop in the U.S. GDP in the second quarter — a stark revision from its prediction of a five percent drop earlier this week. 

Even that’s not going to be enough to clear the outstanding debt issue. But the important thing is not the size of the estimated contraction, it is the fact that the margin of error over the course of less than a week is so massive.

Meanwhile, the federal government is about to prevent Americans from travelling out of the country. Curiouser and curiouser….

The State Department is preparing to issue the strongest travel advisory it can, two individuals familiar with the decision told Politico Thursday. It’ll tell Americans abroad to either return to the states or prepare to shelter in place — a Level 4 advisory, those sources said.

China and Mongolia are currently the only countries subject to a State Department level 4 travel advisory due to spread of the new coronavirus. The rest of the world is under a level 3 global health advisory, which suggests travelers reconsider their plans. The escalated level would instruct Americans to halt all travel out of the country; Secretary of State Mike Pompeo has approved the measure, Politico reported.

They will never fix anything no matter how sternly they are warned about “the consequences next time”. After the last round of bailouts, all they did was double down on what they were doing prior to 2008 and continue their financial rapine without restraint. All the paper wealth everyone “has” is nonexistent, it’s just multiple claims on the same underlying property that allows the financial elite to skim off the incessant churn and turn it into stronger property claims. And that is why every debt-based system always collapses over time, as the current financial system is in the process of doing.

Before sunrise this morning, a normally calm and very senior Wall Street banker texted me: “All hell is about to break loose. No safe havens.” His text could not be ignored, coming as it did on the morning after hedge fund manager Bill Ackman’s 28-minute cri de coeur to CNBC yesterday, during which he essentially demanded that the U.S. immediately shut down for 30 days to stop the spread of the coronavirus. What was he talking about, I asked….

Now, apparently, the scourge of interconnectivity is back. Companies are drawing down their lines of credit with abandon. The senior banker seemed to be especially concerned about the portfolios of private equity companies, which are by definition mostly piled with debt and therefore at higher risk of default as the economy contracts. The big worry now among private equity types is that the $1.5 trillion or so of so-called “dry powder”—money that is sitting unused in their coffers or on-call from their limited partners—will now be needed to shore up existing portfolio companies with acute cash needs, rather than for new investments, which would be the preferred course of action in a more normal time, especially with stock prices down around 35{de336c7190f620554615b98f51c6a13b1cc922a472176e2638084251692035b3} from their February highs. The big worry currently is that the limited partners of private equity funds have enough of their own problems that now they won’t be able to honor their capital calls as they start coming in from the general partners.

That’s yet another scary thought: the domino effect of one private equity portfolio company after another getting into trouble could well be a further negative catalyst to an economy already on the brink of collapse. If one private equity portfolio company after another slips into bankruptcy because limited partners don’t make good on their capital calls, that could mean hundreds of billions more of creditor and shareholder losses.

This is why usury was banned by Christendom and is prohibited by the Bible. I warned everyone back in 2008-2009 that if the banks were not permitted to fail, the next failure was going to be more difficult. It’s really not hard to see these things coming, as the patterns of the crisis developing are easily recognizable. And the bigger the bank, the more internationally interconnected it is, the more likely it is to be taken down by the “unexpected” collapse of the system which will likely begin with the failure or bailout of a massive, well-respected institution like Deutsche Bank.

Another financial crash will likely begin later this year, and for much the same reason as 2008

It might sound like a risky strategy at a time when millions of Americans are drowning in debt: keep raising the limit on people’s credit cards, even if they don’t ask. But that’s exactly what big banks have been doing lately to turbocharge their profits, leaving customers with the potential to rack up even bigger monthly bills.

For years after the financial crisis, Capital One Financial Corp. resisted that step for customers who looked vulnerable to getting in over their heads. In internal conversations, Chief Executive Officer Richard Fairbank characterized the restraint as a radical theology, in part because it went beyond post-crisis requirements, according to a person with direct knowledge of the discussions.

But then Capital One — known for its “What’s in Your Wallet?” slogan — reversed course in 2018, after the bank came under pressure to keep revenue growing. The company’s revenue reached a record last year.

The same reversal is playing out across U.S. banking, as more customers get unsolicited access to additional credit, in what’s becoming a new golden age of plastic. The goal: to get consumers to borrow more. The question, just like in the heady 2000s, is how it will end for lenders and borrowers alike. Research shows many consumers turn higher limits into debt. And the greater the debt, the harder it is to dig out…. Outstanding card borrowing has surpassed its pre-crisis peak, reaching a record of $880 billion at the end of September, according to the latest data from the New York Fed’s consumer credit panel. 

Unfortunately, it’s not possible to correctly compare the amount of total debt to the situation in 2008, because the series that dated back to WWII and proved so informative was significantly modified and rendered considerably less useful by serious revisions to the state and local government sector.

Even so, the modified version shows that total credit market debt outstanding is now at the same level that it was in the third quarter of 2007. The intervening 12 years have been a period of debt disinflation, essentially a period of treading water with debt growing too slowly to artificially grow the economy but also not being cleared. For the inflationistas, this was the attempt to print their way out of the situation.

As I said back in 2008, it didn’t work because it can’t work. You can print paper, but you cannot print debtors or debt. Sooner or later, a lot of the debt will be written off, because mathematics dictates that the interest payments will eventually become unsupportable.

That isn’t to say that it is a GOOD option or the best option available. But it is a better option than continuing the post-1965 trajectory of driving the price of labor ever downward in order to keep the usury pumps going:

Every single economic policy change since about 1990 has had two primary effects:

a) lowered real wages through increased labor market participation and/or lowered demand for labor
b) increased the value of fixed assets or investment instruments

In other words, if you were “holding” in 1987, when the oldest Boomers were forty and the youngest were twenty-five, you’re golden now. If you were just starting your career in 1987, you were racing against time. If you’re starting today, the deck has been stacked against you higher than you’ll ever clear. Want to live the middle-class life of 1975? Better hope your IPO nets you ten million bucks. The wealthiest of the Baby Boomers deliberately created a world in which they’d pay less for the things they wanted (employees, labor, televisions) while being paid more for the things they owned (real estate, index funds, 1959 Les Pauls, 1985 Porsche 911s). It was a hell of a trick, wasn’t it?

Eric Chester looks at the hellscape generated by his generation and what he sees is that there aren’t any more paperboys. I look at it and I have serious concerns. I note that support for explicitly socialist government is growing by leaps and bounds. Some of my friends think this is because the Millennials are stupid. “Don’t they know that they won’t be the people who benefit from a communist government?” This is what I think the proto-socialists have figured out:

a) In the event of a Red Revolution in this country, they have a very slim chance of becoming part of the nomenklatura who have power, real estate, and freedom to determine their own lives.
b) If there is no Red Revolution, they have precisely zero chance of ever owning a home, saving for retirement, or starting a traditional family.

This is why the Nationalist Right is inevitable. This is why the globalist world order will fail, either in Nationalist ice or Socialist fire. And the painful economic reality is that either course will be more viable than the status quo. This explains the otherwise inexplicable appeal of Bernie Sanders. As awful as he is, the jewish socialist is legitimately a less horrific candidate than the jewish corpocrat.